The CARES Act: The Largest Stimulus Package in U.S. History

The last few weeks have been surreal and frightening as we watched a pandemic accelerate across the globe.  At first is seemed like a geographically distant and even detached issue that would never step foot on our doorsteps.  Then within a matter of weeks the tones of our leaders grew stern and we as a nation found ourselves self-isolating from friends and loved ones.  The entire nation is being asked to completely derail their lives in hopes of flatten the infection curve.  These are trying times for everyone, to say the least.  The global economy and financial markets have shuddered in response.

With huge swaths of our economy shutting down for an unknown period of time, it is inevitable that many Americans will struggle with the financial impact.  If you are a small business owner, you may be wondering how to pay employees or even keep your business afloat.  Your children’s daycare likely has staff struggling from the school’s closure.  Restaurant employees recently laid off may now be relying on their child’s free school lunch programs to preserve dwindling savings.  If you were planning to retire this year, you might be reconsidering. 

In short, people across all walks of life are going through financial hardships due to this ensuing pandemic.  Fortunately, the government has stepped in to provide some economic relief.  The Federal Reserve has acted with unprecedented speed to inject much-needed liquidity to the financial system.  Now Congress has taken monumental measures to further support a wavering economy 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748), also known as the CARES Act, passed the Senate and was signed into law by President Trump.  Marking the largest stimulus package in U.S. history, the Act provides $2.2 trillion in emergency relief intended to address the economic fallout of the 2020 coronavirus pandemic.  The legislation is aimed to provide unprecedented aid to individuals and businesses across the U.S. economy in response to the Coronavirus (COVID-19) pandemic. 

We have outlined these and other key provisions in greater detail below.  In summary, the CARES Act presents significant opportunities for both individuals and businesses in these challenging times. 

Lastly, On Monday April 6th join us for a conference call at 1:00 pm where we will hear from Kevin Williams, Vice President of the Private Wealth Solutions Group, at Blackstone.  Kevin will discuss where firms like Blackstone are finding investment opportunities in the private (not public) market, which sectors they like and which sectors they would prefer to avoid while we remain in the midst of this downturn.  Message us if you are interested.

HELP FOR INDIVIDUALS

Immediate Payments to Taxpayers

• How Much:  $1,200/taxpayer or $2,400/married couple filing jointly plus $500/qualifying child.

• Who is Eligible:  All taxpayers whose 2019 adjusted gross income is less than $99,000 (Single) or $198,000 (Married Filing Jointly).  Note that payments are phased out for taxpayers making over $75,000 (Single) or $150,000 (Married Filing Jointly).

• Other Considerations:  These rebates are not likely to be taxed as income.

Student Loan Relief

• Payments Suspended:  Federal student loan payments are suspended through September 30, 2020 and shall not accrue interest.

• Tax Relief:  Students will not have to pay income tax on employer-made payments for education (which historically were taxed.

Unemployment Benefits

• Who is Eligible:  Expanded to include self-employed workers, independent contractors, and freelancers (the “gig economy”).

• How Much:  An additional $600/week for 4 months on top of state benefits.  Benefits are extended to 39 weeks.  (Many states, including California, normally limit benefits to 26 weeks.)

Reprieve from Negative Credit Reporting

• Who is Eligible:  Borrowers who skip or defer a payment during the COVID-19 “covered period.” 

  • Note that this does not apply to payments or debts labeled delinquent prior to January 31, 2020.

• What Happens:  Borrowers will be reported as “current” on their credit reports so their credit scores are not impacted negatively.

No Foreclosure or Foreclosure-Related Evictions

• Who is Eligible:  Borrowers with federally-backed mortgages who claim they were “harmed by the coronavirus outbreak.”  This includes “multi-family borrowers” as defined by the Act. 

• What Happens:  As of March 18, 2020, mortgage servicers cannot initiate foreclosure proceedings or implement foreclosure-related evictions during the “covered period.”  Borrowers get up to 360 days of mortgage forbearance.

HELP FOR SMALL BUSINESSES, INCLUDING NONPROFITS

Forgivable Loan for Up to 2.5 Months of Payroll

• Who Can Apply:  Small businesses and nonprofits with fewer than 500 employees

  • Hospitality businesses (e.g., restaurants, bars, hotels, and RV parks) can treat each of their locations separately.

  • If you have more than 500 employees, you may still qualify.  Talk to your financial advisor.

• When You Can Apply:  As soon as banks start processing the loans, which should be soon.  Loans must be taken before June 30, 2020.   Special provisions allow for “express loans” of up to $1MM, fast-tracking approval within 36 hours.

• How Much You Can Take:  The loan amount is capped at the lesser of 2.5 times your average monthly payroll (based on the 1-year period before the loan date for most borrowers) or $10,000,000.

• How Loans are Forgiven:  If you use the loan for “eligible expenses” during an 8-week period after your loan’s origination date, the amount up to the loan principal can be forgiven, tax-free.  Eligible expenses include:

  • Payroll costs, including salaries up to $100,000 (annualized) per employee, health insurance premiums, commissions, cash tips, and state and local payroll taxes – but not federal payroll taxes(1)

  • Interest payments on mortgages for real or personal property (but not principal or pre-payments)(2)

  • Rent(2)

  • Utilities(2)

• Loan Forgiveness Is Reduced If:

  • You reduce your full-time equivalents (FTEs), including cutting hours, during the "covered period.”

  • You reduce the compensation of employees who make less than $100,000/year by more than 25% during the “covered period.”

  • However, you may avoid the reduction in forgiveness if:

    • You made no further cuts by 30 days after the passage of the Act.

    • You rehire and raise wages to prior levels by June 30, 2020.

• Repaying the Loan

  • Your interest, principal, and fees will be deferred for 6 months to 1 year.

  • The interest rate will be capped at 4%.

  • The maximum loan maturity is 10 years from the date you apply for forgiveness.

  • There are no prepayment penalties.

• Other Considerations:

  • No collateral or personal guarantees are required.

  • Sole proprietors, independent contractors, and self-employed individuals are all eligible under this program.

  • If you already have an Economic Injury Disaster Loan (EIDL) through the Small Business Administration for COVID-19, you can refinance it into this program, but you cannot hold both loans for the same expenses. 

2020 Payroll Tax Deferral

• Who is Eligible:  Employers who do not take advantage of the forgivable loan mentioned above.

• Deferral Dates:  Employers can defer payment of their 2020 payroll taxes and pay:

  • 50% in 2021.

  • 50% in 2022.

Payroll Tax Credit

• Who is Eligible:  Employers who do not take advantage of the forgivable loan mentioned above and who either:

  • Are at least partly shut down due to government orders; OR

  • Experience a decline of at least 50% in gross receipts for a 2020 calendar year quarter compared to the same quarter in 2019.

  • Note:  Nonprofits must be experiencing a partial shutdown due to government orders to qualify.

• Amount of Credit:  Up to 50% of “qualified wages” of each employee

  • Qualified wages are capped at $10,000 per employee.

  • Applies to wages paid between March 12, 2020 and December 31, 2020.

  • Credit is applied against employment taxes.  

Note that there are additional provisions in the bill for relief for businesses, including modifications for net operating losses.  Please consult your financial advisor, tax advisor, or attorney for more details.

(1) Does not include qualified sick leave or family leave wages that receive a credit under the Families First Coronavirus Response Act

(2) Mortgages, rental contracts, and utilities contracts must have been established prior to February 15, 2020 to be eligible.

TAX AND RETIREMENT PLANNING

Extended 2019 Tax Filings/Payments

• Who is Eligible: Businesses and individuals.

• New Deadline: July 15, 2020 to file and pay federal taxes.

• Estimated Tax Payments: April 2020 quarterly payment is not due until July 15, 2020 (June 15 and September 15 estimated payments are still due on these dates).

• State Tax Deadlines: Please check your state’s tax board for their filing deadline. Most states are now aligned with the federal July 15th deadline.

• Note: If you expect a refund, please file promptly!

Retirement Plans: 2020 Required Minimum Distributions (RMDs) Waived

• Who is Eligible: Anyone with Required Minimum Distributions (RMDs) from retirement accounts for 2020. Eligible retirement accounts include:

  • Traditional IRAs.

  • Inherited IRAs (Traditional and Roth).

  • 401(k)s, 403(b)s, and some other Defined Contribution Plans.

• Planning Opportunity: This presents a greater opportunity for Roth IRA conversions in 2020 considering recent market volatility.

Retirement Plans: 401(k) Early Distributions or Loans

• Hardship Distributions Doubled: Hardship distributions from 401(k)s, IRAs, and certain other retirement plans have doubled to $100,000 (without the 10% penalty that normally applies to early withdrawals before age 59-½).

  • These withdrawals are still taxable, but the income tax can be paid over 3 years.

• 401(k) Plan Loans: Loans from 401(k)s (and certain other qualified plans) can be taken up to the lesser of $100,000 or the account balance. Any new or existing 2020 loan repayment due can be delayed for a year.

Charitable Giving

• New Charitable Deduction: For those who do not itemize deductions, there will be an allowable “above the line” deduction for charitable donations of cash (not to exceed $300). (Note:  Contributions to donor advised funds and Section 509(a)(3) supporting organizations are not eligible.)

• New Charitable Contribution Limits for Cash Donations: The 2020 charitable contribution limitation for individuals will now be 100% of your adjusted-gross-income, or “AGI,” if you donate cash directly to a charity. (Note: Donor advised funds and Section 509(a)(3) supporting organizations are not eligible.)  Cash donations used to be limited to 60% of AGI.

  • The limitation is normally 30% of your AGI for stock gifts

  • Anything above this income limitation (100% of AGI for cash and 30% of AGI for stock gifts) carries over for five years.

  • Qualified Charitable Distributions (QCDs) from an IRA continue to be allowable starting at age 70-1/2, up to the allowable limit of $100,000 per year.  Please note QCDs can continue to be executed even with the waiver of 2020 Required Minimum Distributions (RMDs).

• Planning Opportunity: Individuals may be able to offset a significant taxable income event in 2020 with a substantial charitable contribution.